Revenue-hungry politicians attack online sales

Over a decade ago, state officials and members of the business community began a laudable effort to simplify tax collection for companies that have physical presence, or what is known as “nexus,” in multiple states. That effort to reduce the administrative costs of collecting taxes for the approximately 8,000 tax jurisdictions in the United States is known as the “Streamlined Sales and Use Tax Agreement,” or SST.

Even though the SST movement began with the worthy goal of simplification, over the years it has been overtaken by revenue-hungry tax administrators, politicians and interest groups — all too excited to continue their never-ending quest for more state tax revenue. Almost on a daily basis, Americans see news coverage of a state official who laments the loss of sales tax revenue from remote purchases. However, new empirical research shows that online tax supporters significantly overestimate the potential revenue gains. In fact, economics and policy experts Robert Litan and Jeffrey Eisenach find the “uncollected sales tax on e-commerce in 2008 was $3.9 billion — less than three-tenths of one percent of state and local tax revenues.”

The SST movement has always struggled to overcome the Supreme Court’s Quill decision (1992), which raised major interstate commerce concerns over any efforts that would allow states and localities to force vendors without physical presence to collect and remit sales taxes on catalogue, Internet and other remote sales.

Despite the SST movement’s failure to gain much traction in the states or Congress, proponents continue to press the issue by drafting new legislative vehicles to achieve the goal of collecting more revenue. Earlier this year, Senator Dick Durbin (D-IL) introduced the Mainstreet Fairness Act and, more recently, the Marketplace Equity Act has been introduced in both the House and Senate.

Although both Mainstreet Fairness and Marketplace Equity have been touted as answers to a lack of fairness in the tax code between large brick-and-mortar stores and online retailers, the truth is that small businesses would face substantial and costly compliance burdens under both bills.

Originally, the SST movement called for an exemption for small sellers — those with less than $5 million in annual sales. The thinking at the time was that a small business engaging in remote sales — such as a camera shop, a jeweler or a bakery — would face high, burdensome costs in complying with many collection requirements, such as filing paperwork and updating tax software.

However, under the House version of the Marketplace Equity Act, the exemption is reduced to just $1 million in annual sales, which, as the e-commerce trade association Net Choice points out, is 30 times smaller than what the U.S. Small Business Administration defines as a small retailer. In the Senate, the exemption is further reduced to just $500,000 in annual sales. In effect, these reductions would allow the government to capture revenue from more, smaller sellers. This would be the case even though the number of tax jurisdictions in the United States, with which these sellers would have to comply, has grown to 8,000 and only continues to increase, with increasing complexities and changing rules.